3. Policies and programmes for rural innovation

Approximately 14% of Scotland’s business turnover comes from rural areas (GBP 37 billion in 2022). In comparison, urban areas accounted for 79% of total business turnover, while small towns generated close to 7% of total business turnover (Scottish Government, 2022[2]). While rural areas contribute substantially to the national economy, the structure of rural and urban economies in Scotland is distinctively different, with variations within different rural areas such as those on the mainland and those in island regions. Such facts underline the need for differentiated economic development and innovation policies. Despite this, the national policy framework, with a few exceptions, is largely designed to respond to the needs of the economic structure and “innovation system” prevalent in the “central belt” (the area in the middle of Scotland including Edinburgh and Glasgow) and other urban areas of Scotland. While there are several institutions, policies and mechanisms in place to support rural areas, further work is needed to diffuse good practices across territories, better focus innovation and skills strategies in rural regions, and enable local communities to build scale.

This chapter draws on findings from Chapter 2, desk research, the Scottish response to an OECD questionnaire, a virtual mission with Scottish stakeholders in 2021 and a fact-finding mission to four case study areas (Caithness and Sutherland, Outer Hebrides, Galloway Glens and Garnock Valley) in the spring of 2022. It provides an overview of the institutional and policy framework that supports rural innovation and entrepreneurship in Scotland and highlights the critical role of regional enterprise agencies, along with other national agencies and intermediaries, in adapting the national policy mix to the realities of rural, remote rural and island regions, and engaging rural areas by developing tailored policies and interventions. The chapter also identifies key drivers of rural innovation and entrepreneurship, such as the provision of skills, the development of networks and digital connections, access to finance and internationalisation, and initiatives to support capacity building and encourage experimentation in rural SMEs. To conclude, the chapter emphasises the importance of tailored place-based policies that take into account the unique features of rural areas in Scotland and highlights the need for differentiated innovation policies which can enable rural areas to thrive.

Five main organisations provide direct financial and non-financial support to economic development, skills and innovation across Scotland or in specific regions of Scotland, to deliver the mandate of the policy framework for innovation and entrepreneurship, as illustrated in Figure 3.1. The three main regional enterprise entities include Highlands and Islands Enterprise (HIE), South of Scotland Enterprise (SOSE) and Scottish Enterprise (SE), which are arm’s length institutions (non-governmental but responding to government) that tend to have their own areas and some overlapping mandates. For example, SE covers the parts of Scotland that HIE and SOSE do not. Nevertheless, all three organisations could potentially have a national remit in some areas of delivery. An example of this is how HIE delivers the Scottish Land Fund for the whole of Scotland or Community Broadband Scotland, which was a national programme led by HIE before it was replaced by the Scottish Government’s R100 programme for broadband infrastructure. In addition to these three regional entities, Business Gateway provides the services of a national one-stop shop for entrepreneurs.

All organisations identified in Figure 3.1 are executive non-departmental public bodies1 of the Scottish Government. Their operations, in pursuit of their defined mission, are framed by strategic guidance letters from their respective Scottish Government minister, their multiannual strategy and an annual operating plan. In 2017, an Enterprise and Skills Strategic Board (ESSB) was created to drive alignment and co-ordinate activities across Scotland’s enterprise and skills agencies: SE, HIE, SDS and the Scottish Funding Council (SFC). SOSE joined its inception on 1 April 2020. In 2022, to ensure the successful implementation of the National Strategy for Economic Transformation (NSET), the ESSB was replaced by the NSET Delivery Board (Scottish Government, 2022[3]).

Moreover, international trade services and inward investment support are provided by Scottish Development International, the international arm of the three enterprise and economic development agencies. Another key policy instrument is the Scottish National Investment Bank, launched in November 2020 as a development investment bank, with the aim to deliver “patient, mission impact investment” to the Scottish economy.

In addition to the national and regional enterprise agencies, the Business Gateway network, operated at the level of the 32 local authorities, offers a range of professional resources, support and tools to help entrepreneurs learn new skills, create new opportunities and develop sustainable strategies for growth (Business Gateway, n.d.[4]). Business Gateway provides support for start-ups and businesses that are seeking to develop or solve issues (e.g. rising cost support, digital boost) but not necessarily grow beyond the local area/scale. For the latter, Business Gateway is expected to direct the company towards the enterprise agencies, Skills Development Scotland, Interface and other innovation partners.

The Scottish Government, subnational and local initiatives for enabling entrepreneurship and innovation in rural areas jointly work together to create an enabling environment for rural innovation. With several levels of horizontal and vertical government agencies and initiatives, it is important to provide adequate co-ordination mechanisms and build on knowledge from the bottom up. For these purposes, several OECD governments have put in place co-ordination mechanisms, advisory committees and ad hoc consultations to ensure co-ordination and relevance for rural entrepreneurs. One of the mechanisms through which this co-ordination can occur is through “rural councils” that focus on horizontal co-ordination from the centre of government, as further described in Box 3.1. Rural councils at the centre of government are capable of supporting horizontal co-ordination efforts, while vertical co-ordination mechanisms are more often placed-based initiatives that involve different levels of government and local stakeholders. In some cases, these centres of government councils can have an impact on strategic planning that incorporates a forward-looking approach to anticipate challenges for the future of rural regions.

In Scotland, co-ordination on rural affairs including entrepreneurship and innovation is within the mandate of the Cabinet Secretary for Rural Affairs and Islands2 and wider programmes for innovation and entrepreneurship sit in the mandate of the Cabinet Secretary for Finance and Economy. In addition, several horizontal (across ministries and public authorities) councils and initiatives are put in place to ensure that agencies and ministries are jointly addressing challenges. Furthermore, initiatives such as City Region Deals and the associated Regional Growth Deals work, in practice, as unofficial horizontal co-ordination mechanisms.

An independent National Council of Rural Advisers (NCRA) was launched in the summer of 2017 by the then Minister for Rural Economy and Connectivity. The council has mainly two remits: one is to provide evidence-based advice to Scottish ministers on the implications of Scotland leaving the European Union (EU) and the other is to recommend future actions that could sustain a vibrant and flourishing rural economy. The council met regularly, every 4-6 weeks, until it delivered a final report in September 2018. It was formed by 2 co-chairs and brought together a further 12 independent members from across Scotland, with expertise ranging from agriculture, forestry and microbusiness to social enterprise and financial services (Scottish Government, n.d.[5]).

The NCRA final report A New Blueprint for Scotland’s Rural Economy argued that “a vibrant, sustainable and inclusive rural economy can only be achieved by recognising its strategic importance, and effectively mainstreaming the rural economy in policy and decision-making processes” (Scottish Government, 2018[6]). The NCRA disbanded following the delivery of their final report. However, a Rural Economy Action Group (REAG) was established, for two years, meeting six times, to take forward the implementation of the NCRA recommendations. The group primarily focuses on implementing change and achieving outcomes so that the rural economy’s full potential can be realised. Members explored key challenges and where government interventions can have the biggest positive impact on the Scottish economy, rural businesses, communities and the environment (Scottish Government, n.d.[7]). The purpose of the group was to:

  • Monitor and ensure implementation of actions arising from NCRA and other rural development research.

  • Identify barriers and facilitators to progress and work to influence policy and priorities in light of these.

  • Propose a suite of indicators (qualitative and quantitative) that will enable the value of the rural economy to be captured and monitored.

  • Establish reporting mechanisms that build an understanding of the contribution of the rural economy to achieving the purpose and outcomes in the National Performance Framework.

Similar initiatives take place across OECD countries. In the United States, the White House Rural Council works on co-ordinating across different agencies and with stakeholders. In Korea, the Population Policy Task Force creates opportunities to engage with different government agencies and monitor progress in rural areas focusing on aspects of rural well-being (Box 3.1).

Recently, subnational initiatives to engage with local stakeholders provide additional mechanisms to encourage vertical and horizontal co-ordination.

Recently, the Scottish Government has put into place Regional Economic Partnerships (REPs) that work as horizontal and vertical co-ordination mechanisms that seek to engage and create collaborations between local governments, the private sector, education and skills providers, enterprise and skills agencies and the third sector. A REP works to identify shared goals that focus on place-based well-being through combined interests of the public, private and third sectors and of those with academic interests. This platform delivers City Region and Growth Deals (further elaborated in the sections below) with the exception of the Highland and Islands and South of Scotland REPs. They help broaden regional development strategies.

Under the Scotland Act (1999), the vast majority of legislative and financial powers relevant to rural development and innovation (e.g. economic development, education and training, transport) are the prerogative of the Scottish Parliament and Scottish Government, with only limited scope for the UK government to legislate or intervene directly on matters pertaining to socio-economic development (Scottish Parliament, n.d.[12]).3 Nevertheless, the UK-level City Region Deals provide a planning framework for joint investment by the UK and Scottish governments and other public bodies (e.g. local authorities).

City Region Deals are packages of long-term funding, agreed between the Scottish Government, the UK government and local partners. They are designed to bring about long-term strategic approaches to improving regional economies, aiming to help harness additional investment, create new jobs and accelerate inclusive economic growth (Scottish Government, n.d.[13]). City Region Deals are implemented by regional partners and overseen by the Scottish City Region and Growth Deal Delivery Board. Each deal is tailored to its region, reflecting its individual economic strengths and weaknesses, and comprises a programme of interventions to support positive, transformative change.

As of 2022, there are six City Region Deals in Scotland: Glasgow City Region; Aberdeen and Aberdeenshire; Inverness and Highland; Edinburgh and South-East Scotland; Stirling and Clackmannanshire; Tay Cities. Most of these deals cover a mix of urban and rural areas with varying degrees of emphasis on improving urban-rural linkages. Flagship actions focusing on both the major cities and across the associated region are common. In the case of the Inverness and Highland deal, several of the projects are “‘Pan Highland”4 including extending digital coverage, the Science Skills Academy, the Northern Innovation Hub, FIT House (innovative assisted living schemes) and affordable housing. Additionally, the renovation of Inverness Castle intends to diversify tourism benefits and revenue investment across the wider Highland region (Highland Council, n.d.[14]).

In order to extend the coverage of the City Region Deals to the rest of Scotland, six regional growth deals are either in delivery or development. Regional Growth Deals, like the City Region Deals, are agreements between the Scottish Government, the UK government and the local government, designed to bring about long-term strategic approaches to improving regional economies. Every Scottish region now has a commitment to an agreed investment and funding package. The deals cover Ayrshire, Borderlands, Falkirk, Moray, Argyll and Bute, and the Islands (Orkney, Shetland and the Outer Hebrides). Some examples of growth deals with a primary focus on rural innovation are outlined below.

  • The Borderlands Inclusive Growth Deal promotes inclusive economic growth in the South of Scotland and North of England (United Kingdom). The partnership comprises five local authorities, two from Scotland (Dumfries and Galloway and the Scottish Borders) and three from England (Carlisle City, Cumbria, Northumberland). Signed in March 2021, the deal confirms Scottish Government investment of up to GBP 85 million over a 10-year period with up to GBP 65 million over 10 years from the UK government for the Scottish part of the deal (plus a further GBP 200 million for England components of the deal over 15 years). The priority themes for investment are: i) enabling infrastructure; ii) improving places; iii) supporting business, innovation and skills; and iv) encouraging green growth. The GBP 13 million joint government investment in innovation in the south of Scotland will support 3 projects: i) the Dairy Nexus; ii) the Mountain Bike Innovation Centre; and iii) the Natural Capital innovation programme; all of which aim to drive growth through harnessing the potential of the region’s natural assets (Borderlands Growth, n.d.[15]).

  • The Moray Growth Deal, which has been in delivery since 20 December 2021, will build on Moray’s existing regional strengths in areas such as culture, tourism, health, skills, transport, manufacturing and aerospace through an investment of GBP 32.5 million each from both the Scottish and UK governments. This investment, combined with GBP 35.8 million of investment from regional partners resulting in a deal worth over GBP 100 million, will help to unlock further investment and drive inclusive and sustainable economic growth across the area. The vision for the deal is built on four pillars: i) connections; ii) business support, skills and employability; iii) Moray the place/brand; and iv) Moray’s priority business sectors. The deal has a strong focus on innovation within its suite of eight projects such as the Manufacturing Innovation Centre for Moray which, with its links to the National Manufacturing Institute Scotland, will support a cultural shift through innovation and modernisation across technologies and sectors, leading to improved production outcomes.

  • The Islands Growth Deal was signed on 17 March 2021 highlighting specific projects to be funded, with the Scottish and UK government’s each investing GBP 50 million in the deal over a 10-year period. The 3 island authorities and their regional partners have committed a further GBP 235 million to the deal, bringing the total investment package to GBP 335 million. Projects include single island-specific initiatives such as the Orkney Community Vertical Farm, the Outer Hebrides Energy Hub and Shell-volution in Shetland, as well as investment in joint-island innovation-focused proposals in the areas of low-carbon technologies, creative industries and well-being, skills and talent attraction harnessing the natural strengths and assets of the islands to deliver sustainable economic growth.

  • The Argyll and Bute Rural Growth Deal5 adopts a partnership approach to rural economic development, which will deliver up to GBP 25 million of investment each from the Scottish and UK governments (over a 10-year period). Regional partners have also committed to investing a minimum of GBP 20 million, bringing the overall deal investment value to GBP 70 million. The heads of terms were signed on 11 February 2021 and both governments, the Argyll and Bute Council along with key stakeholder partners are now working to agree on the full deal. Innovation-focused investment is expected to support a low-carbon energy plan to address challenges for the island community of Islay, as well as a range of innovation and research projects to drive forward the region’s aquaculture and marine tourism industries (Argyll and Bute Council, n.d.[16]).

A recent review from the Scottish Government’s Regional Economic Policy Advisory Group found that City Region Deals and Regional Growth Deals, alongside the agenda of the NSET, should focus on enhancing regional autonomy and policy co-ordination, build capacity within the REPs, examining funding alignment with REPs skills, a much stronger place-based policy alignment and co-ordination including joint funding decisions, using the pre-existing structures to deliver services while raising the profile of policies with a regional dimension, and establish Regional Intelligence Hubs (which also conduct foresight analysis and focus on well-being ambitions, among other recommendations) (Scottish Government, 2022[17]).

Scottish entrepreneurship and innovation policies are framed at the national level by the National Performance Framework (NPF), the Scottish Government’s Programme for Government (PFG), the NSET and the National Islands Plan, as well as by a number of thematic or geographic-specific strategies and policy plans (Figure 3.2). This framework creates direct and indirect mechanisms for encouraging rural innovation and entrepreneurship. In addition to this framework, many resources that support rural innovation are indirect (such as national policies on education or finance) or ancillary (such as physical and digital infrastructure) support mechanisms. While these are important for rural innovation, the power to adapt such policies lies in co-ordination mechanisms on horizontal and vertical levels, rather than direct funding or programmatic support.

The challenges faced by businesses and stakeholders in rural and island areas in seeking to harness and optimise the potential for innovation as a driver of development are relatively well understood. However, in contrast, a rural, place-based dimension is still almost largely absent from national (Scotland-wide) policy statements and the instruments deployed tend to either target a limited set of (mainly technology start-ups and urban manufacturing or knowledge-intensive service) businesses with (high-) growth and export potential or delivered through sectoral and technological focused initiatives. However, there seems to be a shift to a more place-based approach since the mid-2010s, reflected in a number of Scottish and UK policy plans and investments (e.g. City Region and Growth Deals) as well as the need for a post-Brexit reconfiguration of policy aimed at ensuring areas faced by specific challenges continue to be supported in the absence of EU regional funds. While not immune from criticism, the City Region and Growth Deals, as well as interventions such as Regional Skills Investment Plans, have helped shape a dialogue and a process of strategic prioritisation structure around regional-economic partnerships.

The NPF is structured around a set of desired outcomes and related economic, social and environmental indicators which measure Scotland’s progress towards meeting the national outcomes (Scottish Government, 2022[18]). The NPF is elaborated by the Scottish Government and accountability is distributed between agencies. Each agency reports to their respective ministers (cabinet secretaries) and ultimately the Scottish Parliament as well as various committees composed of Members of the Scottish Parliament (MSPs) that oversee policy areas. Various key performance indicators within the NPF have different deadlines and, therefore, there is no specific overarching deadline for the NPF. Responsibility for issues related to challenges in rural areas and islands belongs to the Cabinet Secretary for Rural Affairs and Islands, which includes responsibility for cross-government co-ordination on islands, Island Communities Impact Assessments (ICIAs) and investment in the National Islands Plan6 and Carbon Neutral Islands, the food and drink supply chain, the Food Standards Scotland agriculture, fisheries and aquaculture, animal welfare and crofting (Scottish Government, n.d.[19]).

National objectives are monitored on a set of key performance indicators tied to the NPF. There are 81 national indicators to track performance towards achieving such goals, with assessments provided by senior analysts within the Scottish Government and decisions on performances evaluated independently of Scottish Government ministers (Scottish Government, 2022[18]). Key objectives include performance indicators related to human rights, culture, environment, health, fair work and business, education, children, economy, international, poverty and communities.

The NPF’s objectives are achieved through the annual PFG. The PFG, among other functions, identifies framework conditions that are targeted at promoting innovation and entrepreneurship, as well as creating an environment that removes barriers for rural entrepreneurs and communities.

The 2021-22 PFG (adopted in September 2021) sets out the objective of “building a wellbeing economy which secures sustainable, inclusive growth for everyone, in all parts of Scotland”. The specific challenges faced by (remote) rural and island areas are addressed at various points in the PFG including goals to:

  • Tackle an ageing and declining population.7

  • Encourage inward migration, and increase population growth in rural areas (e.g. Rural Visa Pilot proposal and the Population Programme).

  • Land use and (community) ownership of land.

  • Entrepreneurship (implementation of a national network of “tech scalers”) and the launch of a GBP 20 million Rural Entrepreneur Fund).

  • Investment of over GBP 6 million annually in the Rural Tourism Infrastructure Fund, helping tourist attractions and their communities deal with the impact of increased visitor numbers on the local infrastructure.

  • Action to improve access to housing, with a specific target of 11 000 new energy-efficient, affordable homes by 2032 in remote, rural and island communities.

The most recent PFG (2022-23) turns its focus on the costs of the COVID-19 crisis, youth and children, public services, transforming the economy, tackling climate change, restoring the environment, supporting communities and Scotland’s place in the world (Scottish Government, 2022[20]). It also: highlights the importance of access to digital infrastructure, for example through the Reaching 100% (R100) initiative and urging the UK government to extend gigabit and mobile networks to rural communities; supports new crofting opportunities through a National Development Plan for Crofting; continues to move forward on the Remote, Rural and Islands Housing Action Plan; and is working on delivering a Land Reform Bill.

To respond to the PFG, the Scottish Government, led by the Cabinet Secretary for Finance and the Economy, has put into place the NSET (March 2022). The NSET is a 10-year plan with a framework for policy structured in five programmes for action: entrepreneurial people and culture; new market opportunities; productive businesses and regions; a skilled workforce; and a fairer and more equal society. A sixth “programme for delivery” seeks to introduce a new streamlined delivery model building on the Team Scotland approach across government and agencies.

The strategy points out that whilst “many parts of Scotland are performing well, there are deep-seated regional inequalities, with post-industrial areas performing less well” (Scottish Government, 2022[21]). The NSET introduces an emphasis on strategic clusters as drivers of “new market development” and highlights several rural-focused initiatives but does not develop a distinctive policy agenda for rural and island areas. The main rural-focused initiatives mentioned in the NSET include the Skills Action Plan for Rural Scotland and the introduction of legislation to expand community wealth building. Islands include many fragile areas, characterised by factors such as declining population, scarcity of economic opportunities, proportionately fewer young people, geographical and transport challenges, and below-average income levels (Scottish Government, 2014[22]; Scottish Government, 2022[21]; Scottish Parliament, 2022[23]).

The Scottish Government adopted the Islands (Scotland) Act8 in 2018 and the National Islands Plan in 2019. The responsibility and implementation of the plan lie under the portfolio of the Cabinet Secretary for Rural Affairs and Islands (see Box 3.2 for more information). Building on the challenges associated with islands, several strategic objectives have been put into action including how to: i) address population decline; ii) promote sustainable economic development; iii) improve transport; iv) improve housing; v) promote health, social care and well-being; vi) promote biosecurity and contribute to climate change mitigation and adaptation (including by promoting clean, affordable and secure energy); vi) empower diverse communities and support arts, culture and languages; and vii) promote and improve lifelong education (Scottish Government, 2019[24]).

The 2021 National Population Strategy, the first of its kind in Scotland, identifies the importance of a population strategy that prioritises family, health, attractiveness of places (migration) and a rural-urban balance. The strategy identifies 14 local authorities primarily in rural regions in the west and south-west that are expected to experience population decline in the next 10 years. The plan is associated with a list of actions in consultation with stakeholders that include, among others, the use of technological and digital tools to support an ageing population and address critical barriers to entrepreneurs in rural areas such as housing, health and family planning services (Scottish Government, 2021[26]).

As of the drafting of this report, a new overarching innovation strategy for Scotland was released. After an open call for inputs and consultation with several experts, the strategy was released in June 2023. The new innovation strategy should adopt a suitably differentiated approach, a “rural lens” that takes account of the diverse forms of the innovation process and the need to improve linkages between rural innovators and sources of knowledge, expertise and investment located in urban areas.

Scotland’s National Innovation Strategy (Scottish Government, 2023[27]), released in June of 2023, is well intentioned with a focus on the relative comparative advantages of regions. However, its implications towards rural places will need to be further evaluated. For example, the programme of action on innovation clusters prioritises science and technology sectors focusing on the energy transition, health and life sciences, data and digital technologies and advanced manufacturing. This choice of sectors excludes the relatively larger share of service and agricultural sector firms in rural areas and it still measures success using patents and R&D spending, rather than also complementing it with the rate of new companies in rural areas. Scotland’s delivery of innovation and entrepreneurial support through the three enterprise agencies that cover different regions of Scotland and its co-ordination with Skills Development Scotland and the Scottish Funding Council suggests that there are already strong mechanisms in place through which programmes and policies for innovation could be regionalised and targeted to rural places.

In the decades prior to Brexit, a major influence on policy orientations and a significant source of funding was provided by the ESIF, which were a particularly important source of support for entrepreneurship and innovation support in Scottish rural and island regions. During the EU programming period 2014-20, the ESIF programmes for Scotland mobilised over EUR 24.1 billion in funding, of which EUR 12.3 billion came from the EU budget. Of the total funding allocated to Scotland, EUR 7.8 billion was spent through the European Regional Development Fund (ERDF) programme covering all of Scotland, close to EUR 7 billion through the European Social Fund (ESF) and Youth Employment Initiative (YEI) programmes and EUR 9.3 billion through the Scottish Rural Development Programme. At the current time, the funding under the ESIF programmes agreed for the period 2014-20 is being wrapped up (expenditure is eligible for EU co-financing until 31 December 2023) (Scottish Government, 2021[28]).

With a view to (partly) replacing the EU ESIF funding, the UK government has launched four new investment programmes to support communities right across the country in collaboration with local partners (UK Government, 2023[29]). These investment programmes include the following:

  • The GBP 220 million UK Community Renewal Fund provides funding to help places across the UK prepare for the introduction of the UK Shared Prosperity Fund. Twenty-two Scottish local authorities were awarded funding in 2021 of close to GBP 18.5 million. Of the Scottish total, three of the local authorities in the Highlands and Islands area were awarded 13% of the total; while the two local authorities in the south of Scotland were awarded 15%. The projects funded in these rural areas are wide-ranging in topics, from science, technology, engineering and mathematics (STEM) education, a Seaweed Academy, harbour redevelopment or tourist infrastructure and services such as mountain biking in the South of Scotland (UK Government, 2021[30]).

  • The GBP 4.8 billion Levelling Up Fund (LUF) contributes to the levelling up agenda by investing in infrastructure that improves everyday life across the United Kingdom, including regenerating town centres and high streets, upgrading local transport and investing in cultural and heritage assets. Under the first round of the LUF, 8 Scottish local authorities were awarded GBP 172 million in funding (10% of the total funding of GBP 1.7 billion) and none of the projects funded were in rural areas. The methodology used to develop an index of priority places for the LUF was contested by many Scottish local authorities as, unlike for England, the Scottish prioritisation did not perversely include an indicator of the need for improved transport connectivity (which was seen as favouring urban over rural local authorities in the prioritisation ranking) (Scottish Parliament, 2021[31]).

  • The Community Ownership Fund. The UK government is providing GBP 150 million over 4 years to support community groups in England, Northern Ireland, Scotland and Wales to take ownership of assets and amenities at risk of being lost. In the first-round call launched in October 2021, six Scottish projects were awarded funding including, for example, the New Galloway Town Hall in the Glenkens area of Dumfries and Galloway. The 6 Scottish projects received a total of GBP 1 196 190 or just under 12% of the total funding awarded under the first-round call (8 calls are planned in total).

  • The UK Shared Prosperity Fund (UKSPF) seeks to “spread opportunity and reverse the country’s geographical disparities” (UK Government, 2022[32]). In Scotland, the UKSPF supports delivery through the eight Regional Economic Partnerships (REPs),9 the establishment of which was recommended by the Scottish Government’s Enterprise and Skills Review in 2017 and which align with the City Region and Growth Deal partnerships. A total of GBP 212 million in funding has been allocated by the UK government to the UKSPF for Scotland for the 3-year period 2022-25. The fund was launched in April 2022 with investment plans submitted by 1 August 2022 (Scottish Government, 2017[33]). Although the UK government claims that “funding will match what was previously spent in Scotland”, even if the GBP 212 million is doubled for another 3 years it would be less than the ESIF funding for 2014-20 (UK Government, 2022[32]). The question remains as to what extent this funding is additional to the agreed UK government contribution to City Region Deal projects (SPICe Spotlight, 2022[34]).

The Scottish Government is funding Community Led Local Development (CLLD) domestically to replace the European Commission’s LEADER programme, which would have previously been funded under ESIF. All UK Shared Prosperity Funding is currently directed through local authorities, although there is concern that this does not always reach those at grass roots level in rural and island communities. Often, even the best-willed, most effective public agencies have local issues that require capacity building, local determinism and participation to deliver a bottom-up delivery approach to national strategy.

The EU research and technology framework programme Horizon 2020 (covering the period 2014-20) also provided significant funds (over EUR 876 million during the period) for research and innovation projects involving Scottish organisations (universities, businesses, etc.). This included funding to support innovation in rural areas, e.g. in support of the development of wave and tidal energies in Orkney and the Caithness region in the far north of Scotland. The Highlands and Islands received over EUR 50 million under Horizon 2020 of which EUR 30 million alone went to organisations based in Orkney, largely for marine power and related green hydrogen technologies.10 However, no organisations based in the south of Scotland region (Dumfries and Galloway and Scottish Borders local authorities) received funding under this competitive programme pointing to the absence of significant research and innovation players in that area. Looking to the future, the exclusion of Scottish organisations from the EU’s Horizon Europe framework programme (2021-27) will be detrimental in terms of access to funding and expertise networks for innovative projects. Furthermore, programme funding like the EU’s Interreg has provided opportunities for collaboration through which innovations are more likely to occur. These funds address larger challenges in the pursuit of addressing rural depopulation, remote service delivery and women entrepreneurship.

At the UK level, UK Research and Innovation (UKRI) funds academic and industrial research across the United Kingdom via domain-specific research councils and Innovate UK.11 Data for 2020-21 on spending by the Scottish region underline the strong concentration of R&D funding in the two “central belt” regions, both in absolute and relative to gross value added (GVA) and per capita (as described in the table below).

The proximity to universities is an important factor in determining innovative practices, in particular, for high-tech and science and technology fields that require investment in R&D machinery and infrastructure for innovation. For example, Heriot Watt University's Orkney Campus operates the International Centre for Island Technology. It is located close to innovations in renewable energy including wave and tidal energy. More broadly, the University of the Highlands and Islands model is associated with research centres focusing on innovation in marine science (e.g. the Scottish Association for Marine Science) and the environment (the Environmental Research Institute). Universities often participate in R&D close to their locations,12 whether it is for inhouse research or in partnership with firms looking to experiment. R&D-type investment tends to have an effect on radical or disruptive innovation, however, mostly in highly specialised regions.

The data concerning the funding by “devolved administrations” (i.e. from the Scottish Government budget) only concern funding allocated by the Scottish Funding Council (SFC) for specific instruments: the Global Challenges Research Fund (GCRF) and grants for research and innovation and additional research (capital funding) to universities. Southern Scotland is not included as no university is headquartered in the region, although some of the spending allocated to universities may be distributed to a department or campus in the region. The amount allocated to the Highlands and Islands seems to be very low and some caution should be applied in interpreting these data. For instance, data from the SFC suggest that the University of the Highlands and Islands was awarded GBP 2.26 million in financial year 2020/21 by the GCRF and GBP 3.7 million for grants for research and innovation, hence considerably more than the GBP 1 million indicated. In addition, UKRI does provide several dedicated funding initiatives that focus on local impacts, such as the Strength in Places Fund and Local Acceleration Fund (SFC, 2020[36]; 2021[37]).

Overall, the concentration of funding provided by UKRI (and the SFC) appears to be strongly driven by the presence of universities thereby favouring urban regions over more rural ones.13 Comparative analysis from Canada and the United States has demonstrated that the role of universities with strong linkages to rural firms are critical to encouraging innovation in rural regions. This is the case in particular when there are extension universities that are connected to local communities or universities whose main campuses are in rural communities such as land-grant universities in the United States (OECD, forthcoming[38]; forthcoming[39]; Maloney and Valencia Caicedo, 2022[40]; Lyons, Miller and Mann, 2018[41]).

In sum, there are a variety of overlapping policies and institutions that are relevant for promoting innovation and entrepreneurship in Scotland. These include growth deals, regional partnerships and initiatives from local authorities and enterprise agencies. Table 3.2 provides a list of the economic development planning framework, using the four case study areas as a basis for understanding territorial variations in relevant policy frameworks, partnerships and government bodies.

This section identifies and discusses selected policies and actions to foster innovation in rural areas by strengthening access to skills and training in rural communities, developing networks and local community-led initiatives for innovation, promoting digital infrastructure, facilitating access to finance, fostering internationalisation of rural firms, supporting capacity building and encouraging experimentation in rural SMEs.

Despite a mitigated decline in the share of the rural population as compared to other OECD countries (see Chapter 2), population decline in rural areas is still a concern. The 2021 National Population Strategy commits the Scottish Government to take a “place-based approach to demography” and identified three main challenges facing Scotland in countering population decline and notably the importance of “maintaining a sustainable spatial balance of our population across Scotland’s urban, rural, and remote locations” (Scottish Government, 2021[26]). The document noted that the west coast authorities and those in rural and remote areas are facing depopulation as people move to larger towns and cities for employment and education opportunities. The strategy also highlighted that while rural and remote areas tend to have higher fertility rates, access to high-quality and affordable childcare is a barrier to encouraging young families to move to or stay in rural areas. Third, restricted immigration (e.g. of EU citizens post-Brexit) is particularly disruptive for rural and remote areas of Scotland, where the older age structure14 means that in-migration is a key means of countering depopulation. HIE carried out the study focused on changing attitudes and aspirations of young people aged 15-30 in relation to the Highlands and Islands of Scotland in the years 2015 and 2018. The 2018 study revealed that, since 2015, an increasing number of young people want to live and work in the Highlands and Islands (HIE, 2018[42]).

This attitudinal shift creates the right conditions but challenges remain for youth in rural areas, including housing and jobs which are critical factors enabling them to stay. Access to and retaining skilled people in rural areas is highlighted as a concern in Scotland. The 2022 Rural Scotland Business Panel Survey (Scottish Government, 2022[43]) found that access to a skilled workforce was seen as a key factor in helping businesses achieve their plans. Almost two-thirds of employers (65%) were experiencing workforce-related challenges. The most common challenge was the cost of labour (38%), followed by skills gaps (28%), unfilled vacancies (23%) and staff absences (22%). The main issues contributing to workforce-related challenges were a lack of candidates (51%) and difficulties accessing specific skillsets (46%). The top actions employers reported they were taking were upskilling or reskilling the current workforce (50%) and investing in new technology (39%). Remote rural and island businesses were more likely to experience a range of issues related to their workforce, including poor transport connections, unattractive working hours or conditions, and a lack of accommodation, childcare or opportunities for partners (Scottish Government, 2022[43]).

The Scottish policy response to such challenges is varied, ranging from efforts to reinforce university education in rural areas (or on courses relevant to rural priorities), increasing rural entrepreneurship training and mentoring, skills gap assessments and investment plans, improving access to lifelong learning (e.g. through digital delivery channels), encouraging rural employers to invest in apprenticeships, vocational training and work placements, and measures to support people to stay in or move to (remote) rural areas to work (access to housing, childcare, distance learning, improved transport links, etc.).

A Skills Action Plan for Rural Scotland has driven forward a partnership approach to developing the skills and talent needed to make sure that Scotland’s rural economy and communities flourish and grow. It was published in 2019 and is being evaluated. It set out five priority areas for action:

  • Better understand the skills rural employers need and align provisions to support this.

  • Provide individuals with accessible education and skills provision to secure, sustain and progress in their careers in rural areas.

  • Develop the current workforce in rural areas through upskilling and reskilling.

  • Build a secure pipeline for the future.

  • Take a co-ordinated, strategic approach to tackling skills in rural areas.

On the first priority, Skills Development Scotland (SDS) leads (in partnership with the enterprise agencies, the SFC, local authorities, etc.) the preparation of Regional Skills Assessments (RSAs) that seek to provide an evidence base to inform future investment in skills. RSAs have been developed for local authority areas (e.g. Dumfries and Galloway), city regions (e.g. Inverness and the Highlands), Growth Deal areas (e.g. the Islands Growth Deal) and for rural Scotland (2022) as a whole (SDS, n.d.[44]).

The RSAs are used as a basis for developing Regional Skills Investment Plans (RSIPs) which take account of the particular challenges, opportunities and drivers at the regional level and present a partnership response to these. In a rural context, RSIPs have been notably developed for the Highlands and Islands (2019-23) and South of Scotland (2019-22) regions (SDS, n.d.[45]).

Digital skills are a core element of improving rural connectivity and business development. Evidence from digital skills surveys suggests that digital maturity in rural areas is broadly lower than in the rest of Scotland (urban areas), with a higher share of respondents indicating minimal or basic skills, particularly in the Highlands and Islands of Scotland (HIE, 2021[46]). To help improve Scotland’s digital productivity, the Scottish Government introduced a Digital Development Loan scheme which provides loans to SMEs (trading for at least six months) wishing to improve their digital capabilities and capacity (including digital skills). Digital Development Loans are interest-free and enable eligible businesses in Scotland to borrow anything from GBP 5 000 to GBP 100 000. Loans are interest-free, have no setup costs, can be repaid over any period of up to five years and do not penalise you for early repayment. No director guarantees are required. Furthermore, a new programme to provide expert advice from a creative industries network for businesses in the Highland council area called XpoNorth Digital has started operating to support the digital transition for businesses (HIE, 2023[47]). It is delivered through the Northern Innovation Hub as a service funded through the Inverness and Highland City Region Deal.

Encouraging rural entrepreneurship is viewed as a key factor in diversifying the rural economies in the four case study regions visited. Initiatives such as the Scottish Rural Leadership Programme (SRLP) aim to develop and reinforce the entrepreneurial skills of rural business leaders and develop a form of community of practice encouraging exchange and networking between participants to the programme (further described in Box 3.3). The programme itself is developed through public sector experimentation, with unearmarked funds.

Another example is the IMPACT30 programme, part of the Northern Innovation Hub initiative, which is designed to develop young (under 35) business leaders of the future (the business should be less than 3 years old) in the Highlands and Islands (HIE, n.d.[49]). The programme seeks to support businesses to develop at the national or international levels and help business leaders put new ideas into practice to effect positive change and growth (HIE, n.d.[50]).

In line with the Population Programme and recognising the unique needs of rural and island areas (EAG on Migration and Population, 2019[51]), the Scottish Government has proposed to develop a Rural Visa Pilot proposal, to support people to move to and work in rural communities (from abroad). As migration policy is a reserved power, the Scottish Government submitted a proposal to the UK government in January 2022 (Scottish Government, 2022[52]). The request underlined that the salary threshold for the UK’s immigration system and the Shortage Occupation List is not enough to attract working-age people to rural areas and that the current UK immigration system does not meet Scotland’s migration needs. The letter also proposed to create a “remote and rural partnership scheme”, modelled on the Canadian Atlantic Immigration Program pilot scheme (Box 3.4).

Skills attraction to areas with a labour shortage is a main component of policies in rural areas across the OECD. In Canada, the initiative targeted towards bringing international workers to the Atlantic provinces (primarily rural) seems to have succeeded in attracting workers only when housing and basic services are available. For instance, in the Gaspé Peninsula of Québec, legal migrants are provided single-occupancy housing to work in the manufacturing sector, sponsored by their employers. Without housing, language training (in some cases) and support from the company and local authorities to receive a “soft landing”, such programmes would have less success. Similar findings were concluded for start-up visas in Italy that targeted attracting foreign entrepreneurs, although without a specific regional target (OECD, 2021[53]).

Regional disparities in the share of individuals that start apprenticeships and overall qualifications are persistent (Figure 3.3). In some of the rural areas studied more in-depth in this report, such as the Scottish Borders, the Islands and South Lanarkshire, an increased importance of those entering (modern) apprenticeship schemes can be observed. At the same time, rural areas such as Dumfries and Galloway, East Ayrshire and North Ayrshire observe low to negative changes in the share of individuals in apprenticeship schemes and an increase share of those with medium to high levels of qualifications.

Apprenticeships and collaboration with colleges in rural areas to tailor vocational training courses to business needs and the latest technologies are important drivers of innovation within existing firms and for new employers. Local targeted vocational training is a particular priority for firms in rural regions. One of the actions foreseen under the Skills Action Plan for Rural Scotland was the development of guidance for rural employers on apprenticeships, training and placement support. A Rural Employers’ Toolkit has been published, which provides information on how to recruit apprentices, student placements and ongoing training, including practical steps and costs. Additionally, the Network Support Unit of the Scottish Government supports the Scottish Rural Network, which encourages rural development by sharing information, ideas and good practice (SDS, n.d.[56]). The aims of the network are mainly to:

  • Get more people from rural communities, businesses and the wider public involved in policy developments that affect them.

  • Help improve the delivery of the Scottish Rural Development Programme.

  • Inform farmers, rural businesses and communities about policy and funding opportunities.

  • Encourage innovation in agriculture, food production, forestry and rural areas.

Increasing the take up of apprenticeships by rural employers has been an identified target of past and current skills investment plans. In a recent report, while the level of employer engagement in Scotland (16%) is generally similar to countries within the United Kingdom (England 19%, Wales 16%, Northern Ireland 12%), it is lower than in leading apprenticeship countries such as Germany (21%) and Switzerland (24%) (OECD, 2022[1]). This is in part due to the small size of firms in Scotland, where close to one-third of firms (20%) that do not offer apprenticeships report that it is because it is not suitable for their size. Based on analysis from Chapter 2 on the relatively larger distribution of small firms in rural Scotland, the issue of scale for apprenticeships is greater for rural areas.

There are three types of apprenticeships supported in Scotland:

  • Foundation Apprenticeships: Secondary school pupils (Third to Sixth Year) can choose this qualification as part of their subject choices and get the chance to work with employers.

  • Modern Apprenticeships (MA): Primarily aimed at people who are 16 to 24, although there is no upper age limit. An modern apprentice is employed and works towards a qualification with a college or learning provider.

  • Graduate Apprenticeships: For anyone 16 or above with no upper age limit. A graduate apprentice is employed and works full time while gaining an honours or master’s degree.

The MA programme is particularly relevant for rural employers and, for instance, the Highlands and Islands Skills Investment Plan for 2014-18 sought to expand the number of apprenticeships in growth sectors surpassing the target by 10% in 2017-18. In 2017, the Scottish Government recognised that employers and trainers can incur additional costs when delivering MAs in more remote areas and introduced a rural supplement to the funding available to learning providers; however, this appears to have been discontinued.

Given the distance from main urban areas where universities and education and training centres are mainly located and the challenge of retaining young people in rural areas, apprenticeship training is an important tool to use to bring the skills needed for innovation to rural firms. Many companies invest considerable time and money in apprenticeships as a means of recruiting and training young staff in the required skills. This is particularly important as the specialised skills in fields ranging from engineering, energy technologies, forestry, food and food supplements, drinks, cosmetics, etc. are not readily gained from standard curricula.

Some companies in rural areas are continuing to provide apprenticeship training for young workers. For instance, Jas P Wilson, a medium-large sized enterprise that specialises in forestry tractors and equipment in the Galloway Glens area has a policy of working with apprentices due to the difficulties in recruiting staff. They have recruited a dedicated Learning and Development Manager who oversees apprentices, liaises with local further education colleges and also hosts groups of school children to encourage early engagement with engineering careers. As part of a recent expansion, Jas P Wilson has invested in bespoke training facilities: this includes two classrooms fitted out with smartboards, an adjacent work area that can be used for training and an outdoor training area for machine operations.

While some firms are able to create dedicated learning and development positions, small-scale employers may not have the resources to do so. Engaging with stakeholders and providing incentives and support for employers to engage in apprenticeship schemes are therefore particularly important for smaller firms that account for the majority of firms in rural areas. In rural regions with a larger proportion of small firms and further distances to training centres, several instruments could be used to tackle the main barriers to providing apprenticeships, as elaborated by the OECD (2022[1]) and described below:

  • Some employers could be given financial support to compensate for the costs incurred by taking on and training apprentices. It is important to note that the evidence on the effectiveness of financial incentives for employers is mixed and thus they should be well targeted to minimise deadweight loss and piloted and evaluated to assess costs and benefits. They should also be combined with assistance for micro, small and medium-sized enterprises (MSMEs) that may lack the capacity to access and effectively use such financial incentives. SDS, Scotland’s national skills body, contributes to the costs of training and assessing Modern Apprentices, making enhanced funding contributions for those who are disabled and care experienced, up to and including age 29.

  • Intermediary agencies could facilitate the process of starting and managing apprenticeships, alleviating some of the administrative burdens that fall on employers who take on apprentices.

  • Employers can be encouraged to set up joint networks to provide the comprehensive training standards and frameworks require. Sharing or rotating apprentices can increase employers’ capacity to train apprentices, while also making their training more relevant.

  • Guidance and tailored advice can be offered by various stakeholders, including the Scottish Government, SDS, awarding bodies and learning providers, to better inform employers about apprenticeships and their benefits. Training can also be provided to help employers effectively manage and deliver apprenticeships.

At the graduate level, HIE has been running the ScotsGrad graduate placement programme in the Highlands and Islands region since 2013 (part-funded by the ERDF) (HIE, n.d.[59]). This has proved an effective way of retaining or attracting (back) young graduates. For instance, the Isle of Harris Distillery, which the mission visited, was able to recruit the first apprentice distiller in the Outer Hebrides using the ScotsGrad scheme for a period of 12 months, in partnership with the University of the Highlands and Islands (UHI) Lewis College.

Another relevant initiative is Developing the Young Workforce. DYW is the Scottish Government’s youth employment strategy to better prepare young people for the world of work. The employer-led DYW Regional Groups set up across Scotland seek to connect employers with education at the school and college levels (DYW, n.d.[60]). For instance, in the Outer Hebrides, the regional group has organised career fairs helping to match young people with employers (DYW Outer Hebrides, n.d.[61]).

Various actions have been taken to improve STEM education at the school level. The Science Skills Academy is developing a network of Newton Rooms, working with schools, employers and families to provide exciting and stimulating activities that engage young people and make them aware of new opportunities. A Newton Room offers education in science, technology, engineering and mathematics. The teaching plans of Newton Rooms are called Newton modules. The curriculum-based teaching is varied and focuses on learning through practical activities. Four Newton Rooms have been opened in Dingwall, Fort William, Inverness and Thurso and the Pop-Up Newtown room is touring highland communities with its catchment areas including Badenoch and Strathspey, Gairloch, Kinlochbervie, Skye and Lochalsh and Ullapool.

Additional examples of initiatives and incentive schemes to support employers in the OECD are included in the box below.

In the South of Scotland, GBP 6.6 million funding, from the South of Scotland Economic Partnership (SOSEP) is being used by Dumfries and Galloway College and Borders College to develop a network of STEM Hubs across different locations including Dumfries, Galashiels, Hawick and Stranraer that will focus on the digitalisation of learning in care, engineering and renewables, and sustainability and construction. The hubs seek to address immediate skills gaps in areas such as energy and engineering, construction and care. These will be accessible to school and college students and employers wishing to try the latest technologies or upskill their current workforce. In addition, within the framework of the Dark Sky Park in the Galloway Forest area, a Dark Space Planetarium has been opened in a former school building in Kirkcudbright. As well as adding a new tourist attraction to the town, the planetarium offers school visits and educational tours.

Over the last couple of decades, the University of the Highlands and Islands has become a recognised driver of economic development and skills development in the region. The university operates on a unique mix of tertiary learning courses covering the full range of further and higher education qualifications and operates as a distributed place of learning with 70 learning centres and 13 colleges and research centres across the region (see Box 3.6).

While the South of Scotland does not have its own university, there has been considerable investment into developing access to further and higher education in the region, including the Learning and Skills Network (including the STEM Hubs and partnership with Digiskill Scotland that will enable the two regional colleges to grow their online flexible learning provision over the next five years) and the Crichton campus. The campus site hosts education and training activities of Dumfries and Galloway College, the University of Glasgow, the University of the West of Scotland, the Open University in Scotland and Scotland’s Rural College (SRUC) providing access for students from rural areas to leading further and higher education institutes.

Critically, university networks for upskilling and apprenticeship training in some cases are well integrated to local economies with strong stakeholder engagement. This in the case in the Highlands and Islands region with UHI and, to some extent, in partnership with Scotland's Rural College (SRUC). However, initiatives can be taken to improve and diffuse access to universities to support upskilling and better targeting of local skills training to local skills demand in the labour market through more distributed models of learning, in particular in the south of Scotland.

Rural innovation, generally, is influenced by the local market structure. In many rural areas, the tendency is towards a fragmented market structure of SMEs that are associated with niche markets. SMEs in rural regions can benefit from policies that improve various types of networks – transportation, business, professional and telecommunications – since these help to reduce the penalties of distance and low density, thereby increasing access to external markets (Freshwater et al., 2019[65]).

Better networked firms build strong social capital which access to a variety of resources – financial, technological and human (Moreno and Casillas, 2007[66]) – that facilitate rapid growth and which are easier to obtain in urban regions (Freshwater et al., 2019[65]). Networks ideally include several different actors and generate interactions to work as promoters of development. Once critical mass is achieved, networks can act as sources of information and learning. They can promote new opportunities and be potential creators of new ideas and projects as well as collaborations or joint ventures, and support change by promoting socio-political legitimacy. In the context of rural innovation, local and global networks across rural and urban areas are key. Rural-urban networks link individuals and institutions with more central and cosmopolitan regions (OECD, 2014[67]). Because individual SMEs in a rural region have few local peers in the same industry, local governments need to support opportunities for firms in specific industries to build professional networks through meetings and digital means (Freshwater et al., 2019[65]). The economic exploitation of territorial complementarities between urban and rural areas is an advantage of co-operation because rural areas cannot innovate if they are isolated and are not connected to the market (OECD, 2013[68]).

For rural innovation, networking is crucial and is often created within the range of geographic proximity. Geographical proximity creates density and clustering effects, which reduce production costs. Geographic proximity means that there is a high probability of interaction and synergy between economic agents. Although proximity seems to happen in the context of physical distances, it is accompanied by socio-economic conditions as well. The understanding that increasing connectivity is disrupting long-established spatial hierarchies of interaction is not, of course, peculiar to the discussion of geographically defined rural-urban linkages. Some have argued that organised proximity and relational space are becoming more important than geographical proximity and Euclidean space (OECD, 2014[67]). However, due to the specifics of the general economic environment, these proximity effects can be rarely found and developed in lagging regions. In order to apply the proximity effect to those lagging regions, Camagni (1995[69]) points out four elements:

  • Integrating policy interventions addressing different aspects of the local environment (entrepreneurship, infrastructure, training, etc.).

  • Selectivity in terms of sites.

  • Targeting the enhancement to local existing know-how, to local productive “vocation” (“turn specificities into assets”).

  • Establishing co-operation agreements and partnerships with external firms or public institutions, in order to capture a flow of external energy, mainly in the form of technological and organisational know-how to the benefit of the local production system.

Critically, there are therefore some ways to increase the proximity effect in rural and remote regions:

  1. 1. Building networks that set an appropriate scale for intervention.

  2. 2. Reducing distances between places via digital and physical infrastructure and access to intermediaries in markets.

  3. 3. Developing innovation networks through clusters and smart specialisation.

  4. 4. Sustaining university networks for innovation.

Local community-led initiatives that make use of community benefit funding (from renewable energy, etc.) and government grants (for social enterprises, etc.) help incubate initiatives that make rural areas attractive for (young) skilled people to study, live and work in. Retaining and/or attracting back young people is a key challenge and is dependent on both the quality of infrastructure (digital networks, transport links, housing, etc.) as well as the perceived dynamism and social fabric of local communities.

The appropriate scale of intervention is important for entrepreneurship support. Programmes to support entrepreneurs which have an aspect of reducing distances between places should be an important aspect of policy design. Entrepreneurs can benefit from incentives for joint projects or projects that support a cluster of rural cities and towns but take advantage from networking opportunities. One example of such an initiative is in Galloway Glens, which groups together several areas to provide one comprehensive regional marketing strategy. This type of initiative can be a good example of further integration in different rural areas of Scotland and can help co-ordinate attracting investment and people in view of helping rural entrepreneurs. There may also be scope for further development of this initiative to the status of “regional broker”, whose role is to attract labour, investment and firms, and promote tourism for clusters of firms and communities as described in Box 3.7.

The need for economic development policies that channel advice and investment towards businesses operating in more remote (from main markets, etc.) locations is recognised but not always fully acted on. As was noted in the response to the OECD questionnaire, support provision for such businesses typically requires more intensive public support packages because, in rural areas, they tend to lack the peer support that public interventions build on in more urban locations.

Rural entrepreneurship is supported through several interventions, existing and planned, which help foster such peer-learning and networks of rural innovators. The role of agencies such as HIE (and SOSE, although the early-stage nature of this agency means that it has not yet deployed significant initiatives) in developing support services tailored to the realities of rural businesses is important. They can in part address challenges of scale and territory, by acting as a mechanism through which services and networks can be aggregated. Similarly, the deployment of Scotland-wide initiatives and networks in rural areas (Interface, the new “tech scalers”, innovation centre hubs, etc.) provide rural businesses and innovators with opportunities to link up with sources of knowledge and expertise on a larger scale. There remains scope for further tailoring interventions to the realities of operating in rural, remote and island areas.

Infrastructure and connectivity are critical factors for regional growth. These include investments in internal transport infrastructure, connecting relatively closed and isolated regions to external markets, and ensuring that transport infrastructure capitalises on privileged geographic positions (OECD, 2012[72]). The Scottish Government published the Infrastructure Investment Plan for Scotland 2021-22 to 2025-26 on 4 February 2021 (Scottish Government, 2021[73]). A long-term vision of infrastructure in Scotland is set out, which supports an inclusive, net-zero carbon economy and includes details on over GBP 26 billion of major projects and large programmes. The Scottish Government also published the National Planning Framework 4 (NPF4) on 13 February 2023, which is a long-term plan for Scotland up to 2045 and works as a national spatial strategy for Scotland, setting out spatial principles, regional priorities, national developments and national planning policy. The new investment in mobile connectivity from the United Kingdom and its four service providers is creating coverage through competition amongst providers. However, older infrastructure may not be able to accommodate higher speeds and, in some rural areas, deployment is being held up by challenges associated with planning by local authorities.

To strengthen digital connectivity, the R100 programme – consisting of three strands of activity: the GBP 600 million R100 contracts, the Scottish Broadband Voucher Scheme (SBVS) and commercial viability – was launched. The Scottish Government has committed to providing superfast broadband access – speeds of at least 30 megabits per second (Mbps) – to every home and business in Scotland. Unique in the United Kingdom, the R100 programme builds upon the success of the Digital Scotland Superfast Broadband (DSSB) programme and will ensure universal superfast broadband access. R100 has delivered new subsea connections and brought resilient, future-proofed connectivity to many island communities, providing speeds similar to those experienced in cities. The vast majority of the R100 contract build will be full fibre connections, capable of download speeds of up to 1 gigabit (1 000 Mbps) – more than 30 times greater than the initial superfast commitment. Digital skills can be as important an issue as digital connectivity. The Scottish Government (2021[74]) declared it would ensure Scotland is a fully digitally inclusive nation in which the benefits of technology are available to all. In this strategy, digital education and skills are one of the main actions of the strategy and digital education for children and young people are the main target of the strategy. Other related initiatives such as the Gigabit Broadband Voucher Scheme are providing help for covering the costs of installation to individuals and firms.

Digital connectivity is a frequent and major challenge for entrepreneurs and companies across the regions of rural Scotland. While specific policies for broadband deployment are being targeted by various national-level programmes such as R100, increasing quality access to rural and remote areas is a challenge in most countries and often requires multiple efforts that overcome the barrier for delivering speed at the last mile. Futureproofing not only requires the capacity for high-connection such as installing fibre instead of copper but could also benefit from speed targets in both levels and maximum disparities between rural and urban areas. In addition to the commitment to bring superfast broadband access, rural areas of Scotland might benefit from initiatives that can reduce the market-based incentives challenge to bringing Internet to rural regions, as discussed in Box 3.8.

During the past decade, there was no fully-fledged innovation or smart specialisation strategy15 in Scotland. However, the Scotland Can Do initiative provided a framework that guided a set of policy interventions. Launched in 2013 by the Scottish Government and partners across the public, private and third sectors, Scotland Can Do was a “national endeavour to accelerate entrepreneurship and innovation”. In 2017, an innovation action plan was published based on the first phase of an Enterprise and Skills Review. This plan included four priority actions including the priority to “Support innovation across sectors and places”; however, the strategy document was rather succinct and made no reference to rural areas (Scottish Government, 2017[76]).

At the time of writing, a new innovation strategy is being developed and an evidence paper has been drafted to inform a stakeholder consultation. The paper provides a general overview of the innovation performance and policies in Scotland but makes no distinction between rural and urban areas and their specific innovation capacities and potential (Scottish Government, 2022[77]). However, anecdotal evidence suggested that while there was a huge amount of support for innovation ranging from innovation centres, advanced manufacturing support, R&D funding, etc., there remains a view that this has not fed through into enhanced productivity growth and emerging new clusters of activity to the extent expected (NMIS, n.d.[78]). Moreover, the importance of a place-based dimension has only recently been given higher prominence again after a number of years where innovation was supported on a cross-cutting basis as one element of business development via a large number of services and products.

While there is a good understanding in the Scottish policy system of the importance of a broad-based approach to innovation, the focus of national policy efforts has been on high-tech innovation, developing advanced manufacturing capacities and innovation centres/hubs in specific sectors/technology fields. A traditionally strong emphasis has been placed on the start-up/spin-off ecosystem linked to the, often, world-leading research being carried out at the main Scottish universities. A 2020 review (Scottish Government, 2020[79]) of Scotland’s technology ecosystem16 commissioned by the Scottish Government set out a series of recommendations around five main themes: creating a “tech scaler” national network, improvement in education to create a talent pipeline, “social infrastructure” (networking, peer-to-peer, etc.), integrated ecosystem grant funding and investment funding (Logan, 2020[80]).

The Scottish Government committed to implementing the key recommendations from the 2020 review, backed by over GBP 45 million in funding (Logan, 2020[80]). This includes support for the next generation of Scottish start-ups through a national network of “tech scalers”. These are expected to provide world-class training and mentoring for tech entrepreneurs and opportunities to network and share ideas. As part of their work, all training and education offered will be accessible virtually, ensuring access for businesses in rural areas. In July 2022, it was announced that a GBP 42 million contract for implementing tech scaler support had been awarded to CodeBase, which already runs an incubator in Edinburgh. They will establish seven tech scaler hubs in Aberdeen, Dumfries, Dundee, Edinburgh, Glasgow, Inverness and Stirling (Scottish Government, 2022[81]).

In the past decade, work has been done on cluster mapping both for SE and HIE. In the HIE area, a 2017 study assessed existing and emerging clusters in the Highlands and Islands compared to the European average and selected benchmark regions using the data, methodology and definitions of the European Cluster Observatory (ECO) (HIE, 2017[82]). This analysis was supplemented by an exploration of investment, R&D and innovation activity driving key sectors and clusters, as well as the international linkages characterising the regional economy.17 The research identified three classes of clusters, namely clusters of distinction, of competency and of opportunity. The three clusters of distinction identified were: wave and tidal energy; aquaculture and marine products; and engineering services for harsh environments. For example, the wave and tidal energy cluster, geographically concentrated in the Orkney-Caithness area, draws its comparative advantage from the unique natural resources of the region (25% of the wave and tidal potential in Europe) twinned with world-leading know-how and technology demonstration sites, notably the European Marine Energy Centre (EMEC). The cluster has attracted significant UK, Scottish and international (notably EU before Brexit) funds into the region. The wave and tidal energy cluster is well structured in terms of sectoral associations, energy research and demonstration facilities and innovative funding mechanisms like Wave Energy Scotland.

Other specific opportunities for rural clusters include the dairy and forestry industries and the tourism sector in the south of Scotland. An example of an emerging cluster is the space sector in Caithness/Sutherland and Shetland linked to the proposed creation of launch sites for satellites. Work is underway to create a commercial spaceport in Sutherland to launch small communications satellites into Earth orbit. Up to 12 launches a year are planned. The site will include a launch pad, control centre and associated infrastructure for the transport and preparation of launch vehicles, with the ambition for Space Hub Sutherland to be the world’s greenest spaceport.

An economic assessment published in February 2020 concluded that the launch facility will support around 250 well-paid jobs in the Highlands and Islands, including 61 in Caithness and Sutherland (44 at Space Hub Sutherland itself). Interviewees underlined the potential for creating a cluster and supply chain in the wider HIE region. In particular, HIE’s current launch partner is Orbex, which intends to use vehicles designed and manufactured in the Highlands and Islands at its plant in Forres, Moray. The UK Space Agency awarded grant funding of GBP 2.5 million to HIE to support the development and HIE has confirmed funding in principle for the project totalling GBP 17.3 million (including the GBP 2.5 million from the UK Space Agency and GBP 9.8 million from HIE) subject to conditions. HIE will develop the infrastructure required – access roads, buildings and a launch pad – and a commercial operator is to build and operate the first vertical launch site for satellites on the UK mainland. Orbex has also been awarded funding from the UK Space Agency to support the development of launch vehicles.

While there is room for improvement in incorporating place-based considerations for R&D investment and university-based research, the cluster model for innovation in Scotland is moving towards the direction of best practice. Building on local skills resources is the first step. Providing additional mechanisms for bottom-up cluster development may be of interest to policy makers. This includes co-ordination with the public sector, private sector, academics and civil society on what opportunities may be available in planning the future of rural regions. Such examples of pre-existing cluster development policies that are strongly focused on regional co-ordination and stakeholder engagement are further explained in Box 3.9.

As a part of cluster policies, or as a stand-alone initiative, the link between universities and firms can be a strong enabler for rural innovation. Inverness Campus, developed by HIE, opened in 2015 to help businesses, researchers and academic institutions connect and grow, and serves as a location for those operating in the life sciences and technology sectors, based in the Highlands and Islands of Scotland. In OECD countries, regions that contain an important share of research universities or laboratories often more easily build connections and generate benefits from spillovers. Governments tend to support these types of linkages through a variety of tools that include subsidies for joint endeavours, networking events or other kinds of in-kind and programme support.

For university-firm linkages to provide fruitful, the firms must be motivated to innovate and conduct experiments. Evidence from a recent study in Norway found that many successful initiatives are often determined by the characteristics of firms, rather than initiatives from university researchers (Atta-Owusu, Fitjar and Rodríguez-Pose, 2021[89]). When firms are open to collaboration, they are more likely to collaborate with universities that are nearby. However, incentives for universities are not always aligned. Universities may not necessarily gain as much from collaboration and, as they grow in success, they tend to weaken links with local and national firms. In Scotland, Interface, with 16 years of operation, is a strong mechanism for encouraging this type of linkage. The initiative is used to connect firms to researchers but if often more successful in areas that have close linkages to universities. Other examples of initiatives that build an approach for encouraging university-firm linkages are further elaborated in Box 3.10.

In the South of Scotland, GBP 6.6 million funding from SOSEP is being used by Dumfries and Galloway College and Borders College to develop a network of STEM Hubs across different locations including Dumfries, Galashiels, Hawick and Stranraer that will focus on digitalisation of learning in care, engineering and renewables, and sustainability and construction. The hubs seek to address immediate skills gaps in areas such as energy and engineering, construction and care. These will be accessible to school and college students and employers wishing to try the latest technologies or upskill their current workforce. In addition, within the framework of the Dark Sky Park in the Galloway Forest area, a Dark Space Planetarium has been opened in a former school building in Kirkcudbright (Darkspace Planetarium, n.d.[90]). As well as adding a new tourist attraction to the town, the planetarium offers school visits and educational tours.

The latest report on Scotland’s risk capital market highlights that, in 2021, Scotland attracted GBP 690 million in risk capital investment, over a third more than the GBP 509 million recorded in 2020, with a total of 396 deals (Table 3.3). The value of investment in Scotland in 2021 made up 3% of the UK total and 6% of deals, similar to the position in 2020. There has been a strong growth in the number of deals and amounts raised since 2016 with, however, important regional differences and with fluctuating annual performance for the Highlands and Islands and South of Scotland (the latter accounting for the lowest number of deals and investments of the six regions).

Public funding and support for access to finance for firms and entrepreneurs is broadly speaking available on a similar basis across Scotland, with only a few limited dedicated rural incentives. Traditionally, SE has operated the main financial (equity and grant) funding schemes both for investment and R&D and innovation. This has been done in partnership with HIE, and more recently SOSE, which identify entrepreneurs and start-ups and growth companies in their regions and orientate them towards specialists at SE and investment firms.

The investment function within E supports Scotland’s SME funding market to improve access to early-stage growth capital. The early stage is defined as the pipeline of pre-start-up, start-up, growing and expanding businesses, frequently technology-based, that have the potential to achieve high growth. Two long-standing equity-based instruments operated by SE but available to companies from the HIE and SOSE areas as well, are:

  • The Scottish Co-investment Fund (SCF), which is designed to address financing gaps in co-operation with accredited co-investment partners. Investment can be made in companies from start-up, early-stage to expanding businesses seeking to develop products and/or markets. Through this fund, SE can: match accredited investment partners up to a maximum of 50% of the total funding package on a commercial basis; provide from GBP 10 000 up to GBP 2 million, as part of a total deal size typically ranging from GBP 20 000 up to GBP 10 million.

  • The Scottish Venture Fund, which invests in start-ups, early-stage and expanding businesses seeking funding to develop products and/or markets. This fund can invest alongside private sector investors on equal terms, up to a maximum of 50% of the total funding package on a commercial basis. In this case, SE is a “gap” funder, so companies should seek to maximise private sector investment first. SE can provide from GBP 10 000 up to GBP 2 million, as part of a total deal size typically ranging from GBP 20 000 to GBP 10 million.

In 2020, the Scottish Government also funded an Early Stage Growth Challenge Fund, delivered by SE, and grant and investment funding of almost GBP 25 million was committed to 90 innovative, early-stage businesses in Scotland whose growth ambitions were impacted by the onset of the COVID-19 pandemic.

Another main instrument is the Scottish Growth Scheme, launched in 2016, which sought to provide up to GBP 500 million of financial support to help businesses grow. The scheme is delivered, across Scotland, through by a portfolio of five funds offering microfinance, loan and equity support to businesses:

  • DSL Business Finance (microfinance) provides loans of up to GBP 25 000 to start-ups and small businesses.

  • Business Loans Scotland (loans) provides loans in the range of GBP 25 000 to GBP 250 000 for SMEs with growth ambitions.

  • UMi Debt Finance Scotland (loans) provides loans in the range of GBP 25 000 to GBP 250 000 for SMEs with growth ambitions.

  • Foresight (equity) provides equity investment of up to GBP 2 million within a deal ceiling of GBP 10 million for SMEs with high growth potential.

  • Techstart Ventures (equity) provides equity investment of up to GBP 2 million within a deal ceiling of GBP 10 million for high-growth start-ups and young, innovative SMEs.

From 30 April 2021 to 31 March 2022, the Scottish Growth Scheme unlocked a total investment of some GBP 171 million for 148 businesses, with an average payment of GBP 1.15 million.

The Scottish National Investment Bank (SNIB) is expected to have an expanding role as a key source of investment across Scotland, including in rural areas. The Scottish Government expects the SNIB to invest GBP 2 billion of public capital over the bank’s first ten years (2021-30) with GBP 800 million of public capital to be committed to investment by the end of the 2024/25 financial year. The bank has adopted a mission-driven approach with a focus on three core missions as summarised in Figure 3.4.

Foreign direct investment (FDI) is making a positive and significant impact on Scotland’s economy (Scottish Government, 2020[95]). Inward investors constitute 3% of Scotland’s businesses yet are responsible for 34% of employment (624 000 jobs), 46% of Scottish GVA (GBP 41.7 billion), 50% of turnover in Scotland (GBP 119.6 billion), 63% of business R&D spending (GBP 782 million), 77% of Scottish exports (GBP 24.2 billion), with 86% of Scotland’s top 100 exporters being foreign or UK-owned. Firms that have access to FDI are more likely to also create spillover effects for other firms in the economy (Box 3.11), operate in export sectors and have a higher proportion of spending on R&D and innovation.

The Place Mission referenced in Figure 3.4 is particularly relevant for rural areas although there is no distinction made in the documents explaining the missions between rural and urban “places”. The aim is to extend equality of opportunity through improving places by 2040. The SNIB will seek to invest in places and regeneration to reduce inequality and improve opportunities and outcomes for people and communities. The Innovation Mission seeks to address Scotland’s demographic challenges (including age, health profile and rural depopulation). And the bank expects to focus its business investment activity on those businesses that are in their scale-up phase, demonstrating commercial progress and seeking debt or equity investment in excess of GBP 1 million to support their growth.

In addition to investing in businesses, the SNIB is also tasked with providing investment support for communities and the third sector in order to create local sustainable economies. Such investments may include: businesses, clean energy projects, circular economy waste reduction and recycling initiatives, local affordable or social housing developments and local regeneration projects. It is expected that the bank will invest in commercially viable mission-impact community and charitable investment opportunities requiring debt or equity investment in excess of GBP 1 million.

While investment support is offered for SMEs in rural regions of Scotland, their lack of a rural lens may hinder the equal participation of entrepreneurs across all regions of Scotland.18 Recent work on SME financing through FDI in Portugal found similar challenges in access to finance (OECD, 2022[88]). In some OECD countries, there are specific measures to reduce the gap in access to finance for investment (see Box 3.12) and create a more tailored approach to understanding the risk profile and needs of rural entrepreneurs.

To turn local resources into economic assets, networking is critical in providing SMEs with the know-how and technologies necessary to identify and utilise untapped local resources. To perform well in the external market, rural areas need to identify their “territorial linkage” (OECD, 1995[96]) or “selectivity in terms of site” (Camagni, 1995[69]) to build their niche market strategy. While geographical remoteness may allow rural areas to establish a distinguished territorial image, an external perspective is indispensable in making their way in an external market. Hence, networking is critical for rural innovation to better connect rural SMEs with external markets.

Since Scotland is a trading nation with a long and prominent exporting history, driving the internationalisation of the Scottish economy and ramping up the value of exports is important (Scottish Government, 2019[97]). Evidence from the Small Business Survey Scotland (Scottish Government, 2018[98]) shows that, in 2017, SME exporters were twice as likely as SME non-exporters to have innovated in the previous three years. Table 3.4 shows that, while 59% of international exports are accounted for by large companies (more than 250 employees), small (less than 50) and medium (50-249) companies hold 20% and 21% respectively. The benefits relating to exporting are particularly relevant to SMEs, which employ the majority of the labour force in Scotland. Smaller businesses typically have less access to learning opportunities than large businesses do. Engaging in international trade, however, gives SMEs greater access and knowledge of different markets and production technologies.

To promote export at the UK level, the UK government set out Race to a Trillion to lift its exports to GBP 1 trillion each year, which is projected to reach this level of exports in the mid-2030s (UK Government, 2021[100]). UK export strategy embodies a 12-point plan for exports that will be the joint framework for business and government to accelerate the Race to a Trillion. To support exporters across all parts of the UK, new offices have been opened in Scotland as well as in Northern Ireland and Wales, to level up export growth and support jobs. In addition, the UK Export Academy was established to offer bespoke training programmes and digital tools to help businesses navigate the technicalities of exporting and find opportunities overseas.

Regarding Scottish export, its ambitious target is to increase overseas export from 20% of gross domestic product (GDP), at the current level, to 40% of GDP (Scottish Government, 2019[97]). As the first step, the initial target so far is to increase it up to 25% of GDP by 2029. The leading agents of export promotion are Scottish Development International, which is responsible for providing in-depth export support to Scottish businesses, and the Scottish Chambers of Commerce, through its network of 26 member chambers, which represents 11 000 businesses across Scotland. The main support available for exporters are business-to-business mentoring, wider business support, export finance and digital support.

Business-to-business mentoring is to provide new or inexperienced exporters with advice and support on issues and challenges they face from their peers, who are experienced exporters and interested in sharing their experiences and knowledge. Wider business support is to improve the range and quality of products that Scottish businesses produce. This is supported through the investment in increasing innovation, improved business practices and linking closely with Scottish higher education institutions and colleges. Export finance gives insurance against risks of non-payment by customers, in particular markets or working capital to support the potentially lengthy processes of supply to international markets. Digital support, by stimulating interest, raising awareness and building capacity, helps equip Scottish businesses with the skills and knowledge they will need to seize global opportunities via trading digitally.

There has been a strong emphasis on the field of the difficulties they faced in exporting from a rural base (including availability and cost of transport, market awareness, etc.) and that this had been compounded by the impact of Brexit on existing European markets. Support for internationalisation and export-oriented growth has been traditionally focused on those companies with the greatest export potential/business. These “top” firms are estimated to number 1 200 companies and, according to the data provided by the Scottish authorities (response to OECD questionnaire), “few are located in rural areas”. Scottish Development International (SDI) has a mandate for both inward investment in Scotland and supporting trade with Scottish firms by helping foreign companies identify suppliers of Scottish products and services or seeking innovative solutions. A 2017 strategic evaluation of SDI international activities noted that firms from rural areas found it more costly and difficult to engage with SDI advisers and participate in events.

Partly in response to the difficulties identified in the evaluation, a team of 17 export advisers were contracted by SDI to work with businesses interested in starting to export. These advisers work with Business Gateway to provide two levels of support to businesses: two or three days to explore their interest in exporting; and then working through an action plan with bootcamps, advice from GlobalScot, market information and, potentially, overseas visits.

In practice, the first line of support for smaller businesses seeking to export is provided by the three enterprise agencies (SE, HIE and SOSE) for businesses located in their respective areas. SE co-ordinates a Preparing to Export programme that provides advisory support and training resources to create a comprehensive plan for businesses seeking to export for the first time. Export advisers also operate through the Business Gateway network providing advice through workshops and one-on-one “surgeries” with companies from the areas.

The Business Support Partnership (BSP) has developed a single point of access for entrepreneurs and companies. The platform Find Business Support gives an overview of all funding and services offered by (over 90) public sector organisations across Scotland. Users can search by local authority, sector or type of funding/support (e.g. innovation, trade, digital, etc.). For instance, searching for innovation/R&D funding for industrial manufacturing in the Outer Hebrides generated 16 funding/support services suggestions in the spring of 2022.

A 2022 innovation strategy evidence paper mapped out, based on work by the ESSB, the main types of innovation support per stage (see Table 3.5). Analysis from the report found strong support for ensuring infrastructure costs primarily from the SFC and the Scottish Government as well as organisations for innovation support, while enterprise agencies were primarily delivering initiatives and activities that supported the commercialisation and conversion stages of innovation.

In the HIE area, there are a number of initiatives taken to support businesses in their innovation journey that reflect some of the main opportunities identified for the region (e.g. food and drink). These include, in mid-2022, the Co-innovate Programme, the Northern Innovation Hub, the Food and Drink TechHUB and the Data Lab Inverness Hub as well as access to innovation advice through events and HIE advisers.

Innovation advisory support provided by HIE is available for businesses from any sector and any part of the region at an early stage in innovation. Businesses can benefit from up to two days of intensive time with an innovation specialist to help them progress their project. Support can take the form of innovation strategy review, product and process development, business model options and workplace innovation diagnostic, amongst others. HIE helps part-fund innovation projects with grants of between GBP 25 000 and GBP 100 000. Co-innovate, the initiative funded by the Interreg VA Cross-Border Programme for Territorial Co-operation 2014-2020, aims to stimulate and support innovation in the Argyll and the Islands, Innse Gall, Lochaber, Lochalsh and Skye areas. With partners in Ireland, Northern Ireland (United Kingdom) and SE in the South West of Scotland, the 85% EU funding has enabled HIE to put 2 additional full-time equivalent (FTE) Innovation Programme Managers into these geographic areas and work intensively to generate an additional 180 innovation active businesses over 5 years. Designed to directly benefit early-stage businesses, it raises awareness of innovation and increases the capability to do so. The programme is delivered over five strands, beginning with workshops and going through to academic placements and R&D grants.

The delivery of the Northern Innovation Hub (NIH) is part of HIE’s involvement in the Inverness and Highland City Region Deal. The NIH focuses on specific sectoral opportunities to build a global competitive advantage. It is not a physical hub: instead, it is dispersed and designed to benefit small and emerging enterprises, reflecting the geography and business makeup of the city region. The NIH is built around three key themes: young people; enhanced growth capacity; and sectors and place. It will focus on subsectors of life sciences, tourism, food and drink, and creative industries, where the city region has competitive advantages and where targeted projects can make an impact.

The Food and Drink TechHUB Business Support Service is a fully funded programme of activity designed to help food and drink producers and supply chain businesses in the Highland Council area grow and reach their potential. The support is open to any food and drink or supply chain business that is based in the Highland Council area. The project is also open to entrepreneurs and individuals with plans for setting up a new food and drink-related business. The programme delivers specialist support tailored to participants’ needs.

The Data Lab is Scotland’s innovation centre for data and artificial intelligence (AI). With hubs in Aberdeen, Edinburgh, Glasgow and Inverness, the Data Lab aims to foster innovation that will help Scotland maximise value from data. The Inverness hub opened in April 2019 and is located within An Lòchran on Inverness Campus. It provides the Highlands and Islands with a dedicated centre for data and AI to help build momentum and create further growth and opportunities in the technology sector. The Inverness hub is at the centre of a support programme for businesses in the Highlands and Islands, looking to innovate through data science to solve real-world business problems. It provides access to specialist advice, support and training, and runs events on topics such as data innovation, featuring businesses that are applying machine learning and AI to create value. Over 2 500 businesses across the region are expected to benefit from the programme over a 3-year period.

SE, HIE and SOSE support Scotland’s Open Innovation Marketplace, which matches Scottish and global companies to help them solve challenges and make business growth a reality. Support and funding are also available to encourage collaboration between businesses to develop new ideas and services. Businesses based in Scotland are eligible for the support; they benefit from access to an extensive network of businesses interested in innovation and an opportunity to discover wider funding and support options.

Scotland offers many programmes to encourage experimentation and SME capacity building for innovation. Among notable ones, the integrated Find Business Support one-stop shop is an example of a co-ordination mechanism that can help provide entrepreneurs with information and reduce the costs of searching for support. This is particularly important in rural areas where access to information and services may be more difficult. The forthcoming innovation strategy, while not yet currently released, is working on incorporating regional innovation angles that can provide more tailored support for rural entrepreneurs. Further diffusion of good practices from more established programmes in the HIE region and Co-innovate should be supported. Additional ideas for promoting innovation may be considered outside of the region, for example, via the Swiss model for innovation boosters (hackathons), the Dutch models for cluster innovation at Eindhoven and for promoting experimentation through living labs and regulatory sandboxes19 as described in Box 3.13.

Rural innovation is influenced by the local market structure, which may be fragmented, segmented or involve niche markets. While most rural firms are SMEs, they may still need a larger market than is available locally to reach a minimum efficient scale. Even without an export market, they may be able to survive if they have a local spatial monopoly but only by being able to pass high production costs onto a captive market (OECD, 2014[67]). Besides that, in order to compete against price competition, it is important for SMEs, which have little capital and human resources, to produce high-value products that could overcome the geographical disadvantage of rural areas so as not to make distance merely an additional production cost. A niche market strategy can be essential for rural SMEs if they intend to grow their businesses (OECD, 1995[96]).

SE provides the SMART: SCOTLAND grant, which is one of its R&D grants that aim to support high-risk, highly ambitious projects. It covers conducting feasibility studies. It is only available to SMEs based in Scotland and supports activities that have a commercial endpoint. Grants can support up to 70% of the eligible costs for a small enterprise and up to 60% of the eligible costs for a medium enterprise. These grants are discretionary and match funding must come from private sources.

The Scottish Government provides rural payments and services targeted at agricultural sectors and, among those, several programmes are to encourage innovation. The Knowledge Transfer and Innovation Fund is designed with knowledge transfer components and innovation components. The first is to promote skills development and knowledge transfer in the primary agricultural sector, which will be achieved through providing funding to organisations to deliver vocational training, coaching, workshops, courses and farm visits. The second aim is to deliver innovative on-the-ground improvements in agricultural competitiveness, resource efficiency, environmental performance and sustainability. This will be achieved by meeting the running costs of operational groups seeking to implement innovative projects in these areas.

The other programme is Food Processing, Marketing and Co-operation, which provides grant funding to businesses within the Scottish food and drink sector. The scheme accepts applications for start-up grants for a new food processing business and development grants for an existing food processing business (Scottish Government, 2021[102])

The institutional setting and co-ordination mechanisms in Scotland demonstrate the government’s commitment to supporting rural innovation and entrepreneurship. The co-ordinated approach provides financial and non-financial assistance, including various resources and tools, to help entrepreneurs acquire new skills and create new opportunities. The government’s effort to focus on effective co-ordination and knowledge-sharing through horizontal and vertical co-ordination mechanisms is commendable. The Cabinet Secretary for Rural Affairs and Islands, Land Reform and Islands oversees co-ordination on rural affairs, entrepreneurship and innovation, which is crucial for the successful implementation of initiatives such as the Rural Economy Action Group (REAG) and City Region Deals. The REAG identifies barriers and facilitators to progress and proposes indicators that enable the value of the rural economy to be captured and monitored. The group’s focus on establishing reporting mechanisms that build an understanding of the contribution of the rural economy to achieving the National Performance Framework (NPF)'s purpose and outcomes is crucial for monitoring progress and ensuring the sustainability of rural economic growth.

Over recent years, the Scottish Government has established a range of policies and strategies aimed at promoting entrepreneurship and innovation in rural areas. These policies are guided by the NPF, the Programme for Government (PFG), the National Strategy for Economic Transformation (NSET) and the Islands (Scotland) Act 2018, which provide a framework for addressing specific challenges facing rural areas, such as ageing and declining populations, land use and ownership, entrepreneurship, rural tourism infrastructure and access to housing. To achieve these goals, the government is investing in digital infrastructure, crofting opportunities and land reform and has developed a ten-year plan outlined in the NSET. This plan is focused on promoting entrepreneurship, new market opportunities, productive businesses and regions, a skilled workforce and a fairer and more equal society. The aim of these policies is to create an environment that removes barriers for rural entrepreneurs and communities and encourage sustainable, inclusive growth for everyone in Scotland. At the subnational level, City Region Deals and Regional Growth Deals are key policy initiatives aimed at improving regional economies, with a focus on inclusive economic growth, job creation and investment. These deals are developed and implemented through joint investment by the Scottish Government, the UK government and local partners, including local authorities.

The loss of ESIF due to Brexit has had significant implications for the policy and financing frameworks that support entrepreneurship and innovation in Scotland’s rural and island regions. The UK government has launched several new investment programmes, including the UK Community Renewal Fund, the Levelling Up Fund, the Community Ownership Fund and the UK Shared Prosperity Fund. However, concerns have been raised about the adequacy of these programmes in meeting the needs of Scotland’s rural and island communities. Overall, the Scottish Government’s policy initiatives demonstrate the importance of collaborative partnerships between governments, local authorities and other stakeholders to promote economic growth and innovation in both urban and rural areas. The government’s efforts to fund Community Led Local Development (CLLD) initiatives domestically and address capacity-building issues in rural areas are critical to support investments in local community development in rural Scotland to emerge from the difficulties caused by Brexit, the COVID-19 pandemic and ongoing cost crises.

Scotland is facing depopulation in its rural and remote areas due to people moving to larger towns and cities for employment and education opportunities, although to less of an extent than those in other OECD countries (see Chapter 2). To address this challenge, the Scottish Government has committed to taking a place-based approach to demography and has identified three main challenges facing Scotland in countering population decline. The first challenge is to maintain a sustainable spatial balance of the population across urban, rural and remote locations. To this effect, the Scottish Government should consider introducing policies to encourage businesses to invest in rural areas, such as tax breaks or financial incentives. The government could also work with businesses to improve transport links and infrastructure to make it easier for people to live and work in rural areas.

There are also challenges related to depopulation that go beyond the direct challenges for rural innovation. For the most part, many of these challenges are not necessarily within the direct mandate of the enterprise agencies, however, a more holistic approach to promoting innovations for rural well-being could provide some support for rural entrepreneurs and families. For example, a second challenge would be to consider the promotion of care services in rural areas. In particular, it would be helpful to consider strategies to support innovation in personal healthcare (early life, elderly, childcare, psychological, etc.) sectors for rural families. This can be part of a strategy that aims to support social entrepreneurs, or more directly for for-profit firms to come up with solutions to tackle rural challenges to well-being. In many cases, across OECD countries, it is important to provide high-quality and affordable childcare to encourage young families and a more active female labour force to move to or stay in rural areas. A more holistic approach to rural innovation would be for the Scottish Government to consider investing in rural childcare facilities and making childcare more affordable for low-income families and mothers. The government could also work with employers to introduce flexible working arrangements to help parents balance work and childcare responsibilities. A third challenge, also beyond the complete control of enterprise agencies and the Scottish Government, is to counter depopulation in rural and remote areas through in-migration. The Scottish Government should continue working with the UK government on the Rural Visa Pilot while better targeting the needs of employers and communities through the Remote and Rural Partnership scheme.

To address the issue of access to skilled workers in rural areas, the Scottish Government has implemented various policies. These policies include reinforcing university education in rural areas, increasing rural entrepreneurship training and mentoring, skills gap assessments and investment plans, improving access to lifelong learning through digital delivery channels, encouraging rural employers to invest in apprenticeships, vocational training and work placements, and supporting people to stay in or move to remote rural areas to work through measures such as access to housing, childcare, distance learning and improved transport links. The Scottish Government should continue to promote apprenticeships and collaboration with colleges tailored to business needs and the latest technologies in rural areas. The government could consider providing financial support for employers to engage in apprenticeship schemes, targeted to minimise deadweight loss and evaluated to assess costs and benefits. The Rural Employers’ Toolkit is an excellent resource for rural employers to understand the practical steps and costs associated with recruiting apprentices, student placements and ongoing training. The Scottish Government should prioritise the development of vocational training courses in rural areas that are tailored to business needs and the latest technologies. It should also consider increasing investment in distributed models of learning and expanding access to universities in rural areas. This could involve the development of new partnerships between universities and local stakeholders, including employers and industry organisations, to ensure that training programmes are tailored to the specific needs of the local economy. Additionally, efforts could be made to improve access to flexible online learning opportunities, particularly for students in rural areas.

To sum up, initiatives related to population and skills, the Scottish Government should introduce policies to encourage businesses to invest in rural areas, improve living conditions for families, attract skilled workers to rural areas and provide vocational training courses tailored to business needs. The government should also promote apprenticeships and collaboration with colleges and invest in distributed models of learning to address immediate skills gaps, and create a more dynamic and adaptable workforce, which is critical for sustainable economic growth in rural areas.

The development of innovation networks and linkages is another crucial aspect for promoting rural innovation, particularly in areas where the market structure is fragmented and there are few local peers in the same industry. To support this, policies should be put in place that improve various types of networks, including through the business supply chain and via the circulation of professionals. This can help reduce the penalties of distance and low density, thereby increasing access to external markets. To increase the proximity effect in rural and remote regions, policy interventions should aim to integrate different aspects of the local environment, target enhancement to local existing know-how and productive “vocation” and establish co-operation agreements and partnerships with external firms or public institutions to adopt innovations in the form of technological and organisational know-how for the benefit of the local production system. Investments in digital and physical infrastructure and access to intermediaries in markets should be a policy priority to reduce distances between places. Innovation networks through clusters and smart specialisation should also be promoted, with a focus on support for SMEs in specific industries and the development of place-based innovation ecosystems. Digital infrastructure and connectivity are crucial for regional and rural growth, and policies and investments should be put in place to ensure universal access, promote sustainability and improve digital skills.

Access to finance for innovation and internationalisation are key drivers of economic growth. The Scottish Government has implemented various policies and funding schemes aimed at increasing access to finance for businesses, supporting innovation and R&D, attracting FDI and promoting internationalisation and export markets. To support investment and R&D in innovative businesses, Scottish Enterprise operates long-standing equity-based instruments such as the Scottish Co-investment Fund and the Scottish Venture Fund, The Scottish Growth Scheme provides financial support to help businesses grow, delivered through a portfolio of five funds offering microfinance, loan and equity support. The SNIB is expected to have an expanding role as a key source of investment across Scotland, including in rural areas over 2021-30. The promotion of internationalisation and export markets is also crucial for SMEs in rural areas. In Scotland, the government has set an ambitious target of increasing overseas exports from 20% to 40% of GDP. To achieve this, Scottish Development International and the Scottish Chambers of Commerce play a crucial role in providing in-depth export support to Scottish businesses. Challenges faced by SMEs in rural areas, including the availability and cost of transport and market awareness, are compounded by the impact of Brexit on existing European markets. Governments should prioritise the provision of networking opportunities to SMEs to enhance their know-how and access to technology to identify and exploit untapped local resources. Additionally, rural areas should develop a niche market strategy that leverages their territorial linkage and unique features to compete effectively in external markets.

Finally, Scotland has implemented a range of policies and initiatives aimed at supporting rural SMEs to build their capacity and encourage experimentation. These policies are focused on promoting innovation, increasing access to funding and services, and fostering collaboration between businesses. One key element is the Business Support Partnership (BSP), which provides a centralised platform for entrepreneurs and companies to access funding and services offered by over 90 public sector organisations. This policy is designed to make it easier for rural SMEs to find the support they need to grow and innovate. Another significant pillar is the forthcoming innovation strategy, which aims to provide more tailored support for rural entrepreneurs at different stages of innovation. The strategy will focus on supporting SMEs with infrastructure costs and providing initiatives to support the commercialisation and conversion stages of innovation. The HIE area has also implemented several initiatives, including the Co-innovate Programme, the Northern Innovation Hub, the FoodTech Hub and the Data Lab Inverness Hub. They offer specialised support, such as innovation advisory services, workshops, training and grants for innovation projects. In addition, Scotland supports the Open Innovation Marketplace, which aims to match Scottish and global companies to help them solve challenges and develop new ideas and services. This policy encourages collaboration between businesses, which is crucial for driving innovation and growth in rural areas. Overall, these initiatives are critical in supporting rural businesses in their innovation journey and they can provide a model for other regions to follow.

In conclusion, the innovation ecosystem in Scotland is thriving, with strong support from the public sector for reducing barriers for entrepreneurs. Although there is no overarching innovation strategy, most policies for rural innovation are aligned with entrepreneurship programmes. The initiative to establish a new national innovation strategy is well intentioned but its implications for rural areas need to be evaluated further. The design of policies that are fit for rural regions can further benefit from a reflection of what is needed specifically for encouraging entrepreneurship, also focusing on innovation from small, family-run and older firms. It is important to consider the delivery of funding programmes through a rural lens to ensure that project funding is equally accessible for all of Scotland. For rural regions, more access to innovation support for firm-based innovation and increases in linkages between rural firms and universities could help close the gap.


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← 1. Executive non departmental public bodies (NDPBs) carry out work on behalf of the government but do not form part of it, nor are they directly accountable to parliament. They operate within a framework of governance and accountability set by ministers; often this is defined in specific legislation setting up each body. They employ their own staff, who are not civil servants.

← 2. Wider innovation and entrepreneurship mandates also sit within the responsibilities of the Cabinet Secretary for Finance and Economy.

← 3. The reserved powers which most directly impact rural Scotland include telecommunications/broadband and energy.

← 4. Pan Highland is often used to mean the Highlands and Islands geography minus the three island local authority areas.

← 5. See https://www.argyll-bute.gov.uk/rgd.

← 6. For more information, see https://www.gov.scot/publications/national-plan-scotlands-islands/.

← 7. Scotland as a whole has a projected population fall from 2028 onwards and is the only country in the UK where the population is projected to fall during the next 25 years.

← 8. The legislation itself is not a policy framework but an enabling mechanism making provision for the plan, imposing particular duties.

← 9. Aberdeen City Region, Ayrshire, Edinburgh and South East Scotland, Forth Valley, Glasgow City Region, Highlands and Islands, South of Scotland, Tay Cities Region.

← 10. The source for the data is the Horizon 2020 Dashboard https://ec.europa.eu/info/funding-tenders/opportunities/portal/screen/opportunities/horizon-dashboard (accessed 15 March, 2023).

← 11. Launched in April 2018, UKRI is a non-departmental public body sponsored by the Department for Business, Energy and Industrial Strategy (BEIS). The organisation brings together the seven disciplinary research councils, Research England, which is responsible for supporting research and knowledge exchange at higher education institutions in England, and the UK’s innovation agency, Innovate UK. Funding is provided to researchers, businesses, universities, National Health Service bodies, charities, non-governmental organisations (NGOs) and other institutions.

← 12. In addition, some programmes have satellite locations. For example, the James Hutton Institute has Living Labs on the West Coast even though it is based on the East Coast.

← 13. Again, this conclusion should be treated with caution since the researchers or projects funded may be carrying out research on topics relevant for rural economies or in rural areas. A more fine-grained analysis of funding would be required to identify the real spatial and thematic pattern and assess potential impact on rural innovation.

← 14. Based on population projections, Rural Scotland’s dependency ratio will be 74% by 2043, compared to Scotland’s 60% (Skills Development Scotland, 2022[104]).

← 15. The smart specialisation sectors notified to the European Commission for the 2014-20 ESIF funding period were the same as those identified in the previous national economic strategy, namely: creative industries, energy, financial services, food and drink, life sciences and tourism.

← 16. The system, in its widest sense, that supports and nurtures technology businesses in Scotland, from the early start-up phase through to fully scaled maturity.

← 17. This study was done through an analysis of official statistics, open data on public funding, analysis of internal HIE management information and consultations with sectoral staff in HIE.

← 18. According to the SNIB annual report 2021, the first two investments were made in a technology start-up and a fund working to help deliver affordable, quality rental homes, both located in central (urban) Scotland.

← 19. European Marine Energy Centre (EMEC) has raised the potential role of a regulatory sandbox in exploring the role of green hydrogen in transport decarbonisation.

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